Bank of Cyprus Holdings

Ladies and gentlemen, thank you for standing by. I'm Myrtle, your course call operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the preliminary group financial results for the year ended 31st December 2021. All participants will be in listening only mode and the conference is being recorded. The presentation will be followed by a question and answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephones. At this time, I would like to turn the conference over to Mr. Panikos Nikolaou, Chief Executive Officer, Ms. Eliza Livadiotou, Executive Director of Finance, and Mr. Dimitris Dimitriou, Chief Risk Officer. Mr. Nikolaou, you may now proceed.

Thank you. Good morning, everyone. Thank you for joining our full year 2021 Financial Results Conference call. I'm joined by Eliza Livadiotou, Executive Director of Finance and Legacy, Dimitris Dimitriou, Chief Risk Officer, and Anita Bablou, Manager, IR and ESG. As well as our regular quarterly results, importantly today we are updating and upgrading our medium-term strategic targets and the majority of our presentation will focus on that. Elisa will give a briefer than normal update on our financial results and then I will present our updated medium-term strategy and targets. Our comments on the results will be brief than normal. Our disclosures are unchanged and you will find all the usual information in our presentation pack and associated materials. And of course, we remain available for questions both during this conference call and afterwards. I will start by highlighting some of the key achievements for the year on slide five. will deliver a profit after tax before non-recurring items of $91 million. The reported result for the year was a net profit of $30 million after restructuring another related cost of $61 million. In 2021, we managed our cost base carefully and kept our total operating expenses below $350 million. Our cost to income ratios stood at 60% flat on the prior year. Our capital position has strengthened during the year. As of 31st of December 2021, our capital ratios on a traditional basis were 20.8% for total capital and 15.8% for CT1, both pro forma for trades. We successfully refinanced our Tier 2 at a significantly lower coupon rate and initiated emerald issuance with the inaugural issuance of 300 million single preferred nodes that allowed us to achieve our interim emerald requirement as of 1st January 2022. Balance sheet de-risking is now largely complete. During the year, we reduced our pro forma NP ratio to 7.5% and up 3.1% on a net basis. Overall, in 2021, we have reduced MPs by 75%. Our positive performance during the year and the solid growth outlook for the Cyprus economy has allowed us to update and upgrade our targets for the medium term. We now expect to reduce our MP ratio to 5% by the end of 2022 and to less than 3% by the end of 2025. We reiterate our focus on creating shareholder value and increase our median return on tangible equity target to over 10%, providing the foundations for in turn of dividend distributions from 2023 onwards subject to performance and relevant approvals. Sustainability will continue to be embedded in our culture as we lead the transition of the local economy to a sustainable future. We commit to becoming carbon neutral ourselves by 2030 and to have net zero emissions by 2050, which at the same time will support our customers and communities in this transition. I will now hand over to Elisa to take you through our financial results for the year. Elisa.

Thank you, Banikos, and good morning from me too. So starting from slide six, here we summarize the key highlights of the fourth quarter. I'll briefly go over this. I'll start with the economic context. Year 2021 saw a strong recovery in the Cypriot economy after a period of pandemic-related disruption, providing an improved backdrop against which the bank performed well. GDP grew by 6% in the fourth quarter, well above the Eurozone average of 4.6%. During Q4, we continued to support the country's return to growth and extended a further €471 million in new lending. Overall, we granted 1.8 billion new loans for the year 2021, an increase of a third compared to the previous year, recovering towards pre-pandemic levels. The strong recovery in new lending lays down the foundations of our growing confidence that loan growth will accelerate over the next few years, which we will discuss in more detail later. During the fourth quarter, we have generated a total income of 154 million euros, up 11% on the previous quarter, driven mainly by higher non-NII, which resulted in a positive operating result of 55 million euros. Total operating expenses remained broadly flat Q&Q at 87 million, and with rising income, this resulted in a cost-to-income ratio of 57% for the quarter, down 7 percentage points on the previous quarter. The underlying result for the quarter was a profit after tax before restructuring charges of 27 million euros. In December 2021, the group completed a small targeted voluntary staff exit plan at a one-off cost of 16 million euros. The gross annual savings are estimated at around 3% of total staff costs. Despite this charge, overall, the fourth quarter was profitable with profit after tax at 10 million euros. Our capital position is robust. As mentioned earlier, our capital ratios were 20.8% for total capital and 15.8% for CT1 as of December, both pro forma for health for sale loans. Deposits increased in the quarter by 2% to 17.5 billion euro, and we continue to operate with a significant liquidity surplus that now totals almost 6.4 billion. Turning now to balance sheet de-risking. As a reminder, in the fourth quarter, we signed an agreement for the sale of 600 million euro NPEs in Project KILIX 3, a profitable and capital accretive transaction. Additionally, we organically reduced NPEs by a further 400 million euro during the year. Overall, in 2021, we have reduced NPEs by 75% on a pro forma basis. The performance of the loans under expired moratoria remains solid. 96% of performing loans whose payment deferrals have expired presented no arrears. This continues to be a better performance than expected, now more than a year after deferral expiry, and bodes well for future trends. Moving now to slide seven, where we provide an overview of the macroeconomic conditions. The economy continued to grow in the fourth quarter by 6%, facilitated by a rebound mainly in tourism, trade and professional services. The economy has quickly recovered to pre-pandemic levels, demonstrating its open, small and dynamic characteristics. For 2022, GDP is expected to grow by around 4%. And with the additional implementation of the Cyprus Recovery and Resilience Plan, growth is expected to be sustained at pre-pandemic levels. 2021 tourist activity recovered significantly year on year and the tourist season was extended until late October. Overall, arrivals in the second half of 2021 reached around 70% of 2019 levels. Tourism is expected to recover fully by 2023 to 2024. As Panikos already mentioned, the majority of the focus today will be on our medium-term guidance, and as a result, I will not speak to all of the slides that I normally would. They're all available for you to review, but instead, I wanted to pick up a few important trends. So, moving to slide 12 on the income statement. Net interest income increased to $73 million for the fourth quarter, driven mainly by larger volumes of loans and interest collections. NII for the full year 21 amounted to 296 million compared to 330 million the year before, down by 10% year-on-year, impacted mainly by the continuing pressure from the low interest rate environment and the completion of Helix 2. Non-interest income for the fourth quarter was at 81 million euro compared to 68 in the prior quarter. The quarterly increase is mainly due to higher net insurance income and revaluation gains in financial instruments. For the full year, non-interest income increased to €285 million, supported mainly by higher fees and commissions. Overall, non-interest income was up 20% year on year, more than offsetting the negative NII impact from de-risking and continuing pressure from low-interest rate environment. Total operating expenses stood at €87 million for the fourth quarter and €347 million for the full year, broadly flat both on the prior quarter and the prior year. Provisions for impairments for the fourth quarter of 24 million comprise loan credit losses of 9 million, impairments of 23 million, mainly relating to large illiquid revenue assets, and reversal in litigation of around 8 million euro due to revised estimates for cases provided for. Profit after tax and before non-recurring items was at 27 million for the fourth quarter and 91 million euro for the year. Restructuring and other costs of 13 million in Q4 relate mainly to the 16 million cost of a small targeted voluntary staff exit plan that took place in the fourth quarter. For the full year, restructuring and other costs remain broadly flat, year on year at 32 million. We achieved a return on tangible equity before non-recurring items of 6.6% for the fourth quarter and 5.5% for the full year. The overall result was a profit after tax of $10 million for Q4 or $30 million for the full year. Moving now to slide 13, there are various factors here that drive NII. Whilst volume trends are encouraging, margins will likely remain under pressure in the near term. On slide 16, I'd like to mention that non-interest income grew strongly in the fourth quarter, reflecting mainly higher net insurance income and increased evaluation gains from financial instruments. Net fee and commission income amounted to $172 million for the year, up 19% on a year-on-year basis. Again, Banikos will discuss later our future plans in this space, including expanding our insurance revenues. Moving now to costs on slide 18, total operating expenses in Q4 were 87 million, broadly flat over the previous quarter. OPEX for the year remained below 350 million and we have managed to keep our cost to income ratio flat at 60%. We remain responsive on costs as evidenced by the small staff exit plan we executed in December. Now turning to capital on slide 21, Our CT1 and total capital ratios as of 31st December stood at 15.8 and 20.8 respectively, both from pro forma assets held for sale. During the fourth quarter, we have generated around 50 basis points of organic capital through operating profits and 30 basis points from the reduction in RWAs. These were partially offset by expected loan credit losses and impairments of around 30 basis points. Our CET1 on a fully loaded basis was at 13.7% at December 21, and 14.3% pro forma. The minimum requirement for 2022 for CET1 and total capital is set at 10.08% and 15.01%, respectively, following a 26 basis points add-on on P2R due to ACB's prudential provisioning expectations, and 25 basis points phasing in of the OSII buffer. It's important to note that the P2G reduction more than offset the increase in P2R for the CT1 ratio. The group continues to monitor opportunities for the optimization of its capital position, including AT1 capital. And finally, turning to cost of risk on slide 26, the cost of risk for the year was at 57 basis points compared to 118 basis points in the previous year, reflecting mainly lower COVID-19-related charges and normalization of cost of risk as balance sheet de-risking is largely completed. For the fourth quarter, cost of risk was at 35 basis points of gross loans and included a reversal of loan impairments, mainly driven by improved cash collections and updated financial information. And with that, I'd like to hand back to Banikos to go through the medium-term strategy and targets.